Cash Flow Management: Buckets of Money

To successfully manage the cash flow and profitability of one’s business, it would be helpful to understand the function of money in your business.

There are three types of money in our businesses:

Cash: This is how we pay for the immediate needs of our business.

Income: This is the revenue – our “top line.”

Growth: This is our long-term investment.

Actual cash is very liquid, meaning we can get to it right now. It sits still in our checking account, doesn’t earn much, but cash makes payrolls possible when receivables grow (we get paid more slowly) or payables increase (more bills are due). Too much cash – if you can say that correctly in a sentence – means we are missing some opportunity, either in terms of investment or perhaps cost of carrying debt.

Income looks like cash and pays the bills as they come in, but it is always in motion. It’s less liquid because it comes in at various times, and leaves at various times, so we can’t always count on it being there when we need it. We usually make up the difference with cash (or perhaps with working capital – money borrowed for short term needs).

Growth is the excess – the amount left over once we have paid the people and the expenses that make our business go. We can take the growth off the table (pay the owners, employee bonuses, etc.); or plow it back into the business with new staff, equipment, facilities, etc. This is the money that can give the highest return on investment during expansion. It’s also the war chest that can help weather the storm in a downturn.

Your business is unique and therefore the three “buckets” of money will be in different proportions than another business, but it’s important to have some money in each bucket. There are robust industry databases than give excellent benchmarks to help determine your needs. These databases may be accessed by subscription, by third party vendors, and some at no cost through libraries.

If your business is waiting on receivables, you will likely need more cash than a business that collects deposits in advance (which counts as cash, just not your cash until the product or service is delivered, unless the deposit is non-refundable) or paid at time of service (like doctor’s offices).

A clear sign of a cash crunch is growing payables. In this situation, it’s like cash, again not your cash, but your supplier’s cash. Your supplier may be okay with this for a while, but if they must wait too long, they could charge more, charge late fees, or even quit doing business with you, disrupting your business.

It is critical for businesses to balance their resources in the most efficient manner to get the most from their efforts in the same way an airplane balances its payload to fly. A failure to achieve balance could prevent a take-off, make for a slow climb, or even lead to a crash.

Michael Noel

Florida SBDC at USF, Avon Park

Specialty: Finance, Marketing

Michael Noel has been a one-man shop as well as on the executive management team of a bank division with more than 550 employees. He works well with diverse teams in developing financial and marketing solutions for their businesses. He has spent the bulk of his career in the financial services industry. His varied business experience includes mortgage, rental real estate and investments and insurance. He earned a bachelors degree in psychology/sociology from Wake Forest University and a masters degree in business administration from Georgia State University. He holds Profit Mastery Facilitator and TTI DISC Certified Professional Behavioral Analyst certifications. He was named Best Financial Advisor in 2011 and 2012 in the Reader’s Choice Awards, conducted by the Highlands News-Sun.

He was also a 2014 finalist. In 2018, Michael earned a Valor Award from the Florida SBDC Network for his role in business disaster recovery efforts. Michael has served on the boards of the Greater Lake Placid Chamber of Commerce and NuHope Eldercare Services. He currently serves on the board of Samaritan’s Touch Care Center and the Investment Committee of the Associate Reformed Presbyterian Church.

The Florida SBDC at the University of South Florida is a member of the Florida SBDC Network, a statewide partnership program nationally accredited by the Association of America’s SBDCs and funded in part by the U.S. Small Business Administration, Defense Logistics Agency, State of Florida, and other private and public partners, with the University of West Florida serving as the network's lead host institution. Florida SBDC services are extended to the public on a nondiscriminatory basis. Language assistance services are available for limited English proficient individuals.